How Digital Advisors Work

Monday, December 31, 2018, 6:00 AM | Leave Comment

Instead of discussing your financial goals and needs with a human, the interactions between you and a digital advisor are conducted through a website.

On these websites, you will find an online questionnaire that is meant to assess your current financial situation, goals and risk tolerance. This information is used by the firms to develop and suggest an asset allocation while at the same time managing it.

There are some digital advisor firms that work by investing your money in both exchange-traded funds and mutual funds. You should keep in mind that these firms do not invest in funds that are actively managed but rather in passively-managed funds.

There are some firms that are ready to invest in individual stocks although this is not a common option. As soon as your portfolio has been constructed, your digital advisor will rebalance it on various occasions to ensure that your target asset allocation is maintained.

How Digital Advisors Work

  • A Combination of Digital Advisors With Access to a Human Advisor

    There is also another type of offering in this area that mixes elements of the digital advisor model with a human advisor. In this case, instead of simply relying on your response to the online questionnaire found on the website, the firms conduct a phone or video –based consultation.

    The aim of the discussion is to find more about your goals, risk tolerance and other important details pertaining to your financial situation. If you are a client, these digital firms may also provide you with a human advisor via video conferencing.

    All digital advisors firms have their own algorithms which they use to help them determine what would be a good fit as an asset allocation in your particular situation. Just like human advisors, you can expect some of these firms to be more or less aggressive than the others in their suggestions. These suggestions will all depend on the information you have provided. If the details you have provided indicate a high-risk tolerance, then this will reflect in your firms’ suggestions.

  • Importance of Digital Advisor Platforms

    In a fast-paced world, many investors do not have the time, skills or knowledge required to manage an investment portfolio. On the other hand, investors may simply lack the interest to manage their savings or investments.

    Traditionally, in such a scenario an investor had two main options. The first was to pay a professional advisor to help them manage their bonds, portfolio stocks or mutual funds. The second option was to try their best to manage their own portfolio. The modern world of technology has introduced a third option which is a digital advisor.

    The new technology is changing the way investors manage their investments. They no longer need to rely on a human advisor; they can now be comfortable with a web-based relationship that helps them manage their asset allocation and portfolios online. This calls for digital savvy investors who feel at ease with such a platform.

    The Six Main Parts of a Personal Relationship:

    1. Know me: the first part of a digital experience starts with the client being asked to complete a questionnaire that has a series of questions. Some of these questions are aimed to gauge how big your appetite is for risk, your time horizon, the amount of money you have to invest, and your objectives. A human or digital advisor will need this information in order to better understand the investing decisions of a client and to get to know the customer well. It is, in fact, a regulatory requirement.

    2. Filter and sort for me: just like any trusted advisor, an intelligent digital platform can filter and digest the information given by an investor and then deliver relevant data to perfectly match the user’s needs. In order for this to be accomplished, the platform will take into account explicit interests that are collected over a period of time. This data can also include interest derived from your activities whether online or offline.

    3. Remind me: the relationship between you and an advisor is an ongoing one. Technology makes it possible for a digital platform to occasionally check out if there are any changes to your financial situation through an email or text. The platform will also see if there are changes in investment objectives and what has triggered those changes. Based on such information, dependable and educated guesses can be made about market events, life vents, and any other opportunities. A complete follow up can be made either on a digital platform or through personal contact. In fact, experts agree that both of the approaches are ideal.

    4. Advise me: technology aimed at speech recognition such as Apple’s voice-activated assistant is also used in understanding human behavior, meaning, and intent. As these technologies evolve, they become even more useful at suggesting the most appropriate information related to investing that will prove to be valuable to an investor.

    5. Watch for me: sudden changes such as a drop in an account balance can be sensed by a digital advisor. Such scenarios of interest established between you and the advisor can really go a long way in helping you monitor your account’s activities. Such professional help is what you need. You could receive an electronic message to schedule an appointment to have a deeper look at these changes in your account.

    6. Coach me: financial advisers sometimes can act as a therapist. They may bombard you with bad news and drive you into a ledge when you least expect it. You might feel like ditching your portfolio after falling into a major panic episode. However, large investments have realized that the best channel to use when communication is through well-timed videos and emails. These can be a letter from a charwoman, a blog post or an authoritative article. These methods prove to be highly effective when it comes to offering advice to investors as well as providing certain useful insights on a personal level. It further leads to better investment decisions.

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